Dreaming of life as a non-domicile?

What are the considerations that individuals need to bear in mind to enjoy the best of both worlds – better weather and improved tax efficiency?

Helen Cuthbert, Director, Menzies LLP

30 November 2021

This article is taken from the latest issue of Think Global People magazine.Click on the cover to access the digital edition.

During the pandemic, many people have grown used to working remotely and, for some, this has given rise to a dream to live and work abroad. Growing concern about potential tax hikes in the UK is another reason why individuals are considering upping sticks and heading for warmer, more tax-efficient climes. However, when moving to another tax jurisdiction, there are some important practicalities to consider.
The rise in flexible working as a result of COVID-19 has meant that many people are no longer tied to a particular work location. Other factors that have come to the fore in recent months, such as the wish to be closer to friends and family, enjoy more green space or an improved quality of life, may also be turning people’s thoughts to the idea of living and working abroad.

As the Chancellor explores ways to pay for the pandemic, there may be a spike in numbers of those seeking to become non-resident or even non-domiciled. As well as increasing the rate of Corporation Tax to 25 per cent from 1 April 2023, the Office for Tax Simplification published its review into Capital Gains Tax (CGT) in November 2020. The report recommended to the Government that CGT rates are brought into line with Income Tax and that the CGT allowance should also be reduced, while potentially increasing the number of people required to pay Inheritance Tax (IHT). Such changes are yet to be implemented; however, they appear to remain firmly on the agenda.

While switching to a new tax jurisdiction could enable some individuals to enjoy the best of both worlds – better weather and improved tax efficiency – there are a number of considerations that they need to bear in mind to ensure the transition goes smoothly.

What is the difference between “non-residence” and “non-domicile”?

Firstly, it’s worth understanding the distinction between “non-residence” and “non-domicile”, which have different implications from a personal tax perspective. Whilst a person’s residency is considered to be the country in which they reside and pay tax year upon year, an individual will remain UK domiciled unless they have completely severed ties with the UK. An individual who is domiciled and resident in the UK, is subject to UK tax on their worldwide income and gains on an arising basis. A person’s domicile also has implications for their exposure to UK IHT, as the worldwide assets of UK-domiciled individuals are subject to UK inheritance tax.

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The process of claiming a change in domicile status essentially involves the individual stating that they have acquired a domicile of choice elsewhere and strong evidence would be required to support this claim. Their status may be reported to HMRC on their individual tax return, where this is relevant, yet the difficulty lies in that domicile is often not challenged until an individual has died and their Estate position is reported to HMRC; it then rests with HMRC to challenge and analyse claims for non-domicile.

Evidence of acquiring a domicile of choice outside the UK should involve regularly documenting their future plans and following up on those intentions – ultimately, they must be able to show that they intend to leave the UK and not return. The individual seeking to lose their UK domicile will also need to show strong and numerous links to their new jurisdiction, together with a severing of ties with the UK. A statement demonstrating their intentions and the steps taken at a given point in time can be invaluable in providing the necessary evidence to HMRC in years to come – perhaps for the family when defending the tax position taken by their late relative in respect of legacies left behind. It should be noted that a return to the UK for a formerly domiciled individual will revive their UK domicile of origin with resultant tax consequences for income, capital gains, and inheritance tax.

Seek support from a local adviser as early as possible

Individuals heading for a new tax jurisdiction should seek support from a local adviser as early as possible in the process, and certainly before making the move overseas. This may involve seeking specialist support around how best to structure their earnings, investments, and pension provision. Other complex areas might involve scenarios where an individual is tax resident in two different jurisdictions for a period of time, and therefore may need to seek clarity on how to report their position to the jurisdictions in question. They may also require support in abiding with local tax legislation or, for instance, setting up payroll overseas.

Other considerations

Other more practical considerations might include applying for the right visas, taking steps to overcome language barriers, and putting in place arrangements for family and living arrangements. Often, individuals may make the decision to relocate overseas at a key milestone in their professional life, for example, at the time of a significant business transaction. As such, getting the timing of their move just right, can make a huge difference to realising optimal value from the transaction.

The increased flexibility enabled by remote working has meant that there has never been a better time to move the virtual office to sunnier, more tax-efficient destinations. By seeking the right advice from local experts and timing the move wisely, individuals can enjoy all the benefits of being non-domiciled or non-UK residents, while avoiding any potential tax pitfalls.Helen Cuthbert is a director in the private client team at accountancy firm, Menzies LLP.